Europe tempers power of agency to shut troubled banks
The European Commission proposed on Wednesday creating an agency to salvage or shut failed banks, but the absence of an immediate backstop fund to pay for a clean-up means it may struggle to do its job.
Working in tandem with the European Central Bank as supervisor, the new authority is supposed to wind down or revamp banks in trouble. It constitutes the second pillar of a 'banking union' meant to galvanize the euro zone's response to the crisis.
If agreed by European Union states, the agency will be set up in 2015 and will eventually have the means to impose losses on creditors of a stricken bank, according to the blueprint.
But the new authority will be handicapped by the fact that it will have to wait years before it has a fund to pay for the costs of any bank wind-up it orders. In practice, this means it could be very difficult to demand any such closure.
Officials say the plan foresees tapping banks to build a war chest of €55bn to €70bn but that is expected to take a decade, leaving the agency largely dependent on national schemes in the meantime.
"We have also seen how the collapse of a major cross-border bank can lead to a complex and confusing situation," said Michel Barnier, the commissioner in charge of regulation.
"We need a system which can deliver decisions quickly and efficiently, avoiding doubts on the impact on public finances, and with rules that create certainty in the market."
The EU's executive will also not, however, call for giving a backstop role to the euro zone's rescue fund, the European Stability Mechanism.
The lack of initial funds or recourse to the ESM undermines a central goal of banking union - to sever the 'doom loop' that forms as banks buy ever more government bonds from their home states.
Any suggestion of putting such a safety net in place faced stiff resistance from Germany, which feared that it could be left on the hook for problems uncovered in Spain's banks or elsewhere, when the ECB starts policing the sector next year.
Furthermore, the 'resolution board' that executes bank wind-downs will be forbidden from imposing decisions on countries, such as demanding the closure of a bank, if that would result in a bill for that nation's taxpayer.
Analysts were critical.
"The key problem is that without the ultimate access to fiscal resources, it will be very difficult to agree to shut down a bank," said Guntram Wolff of Bruegel, a Brussels think tank.
This skepticism was echoed by Sven Giegold, an influential German member of the European Parliament.
"Behind all this is an unholy alliance between Germany, which is scared about talk of common liability (for banks) before elections, and France, scared of giving up sovereignty," he said.
The reform will be presented as the second pillar of a banking union, a scheme designed to underpin confidence in the euro zone and end the previously chaotic handling of cross-border bank collapses such as Dexia.
The original commitment, made at the height of the currency bloc's crisis, was to prevent heavily indebted countries from having to contain problems at their banks alone, such as those that nearly bankrupted Ireland.
But last year's pledge by the European Central Bank to take whatever steps needed to back the single currency has calmed investor nerves, taking the pressure off countries to follow through.
The ECB, alongside the International Monetary Fund, is growing impatient.
Speaking on Tuesday ahead of the announcement, Joerg Asmussen, a member of the six-member Executive Board that forms the nucleus of the ECB's policymaking, underscored the need for a "European backstop" for the resolution agency.
The scaling down of the plan is partly in response to Berlin's reluctance to surrender autonomy to a new agency. Germany has been particular sensitive as Chancellor Angela Merkel faces national elections in September.
Some EU officials hope Berlin will soften its stance after the elections, but Asmussen did not expect that, noting that countries such as the Netherlands, Finland, Slovakia and Estonia shared its doubts.
"It's easy to hide behind Germany ... It's a group of countries, it's not only Germany," he said.
EU Commission officials were so concerned about their proposals becoming public that they printed them using a type of 'invisible ink' technology to blank out the text if scanned.
One EU official said the proposal should please Berlin. "This system would be viewed as a good system by our German friends," he said. Other countries who hoped for a more ambitious blueprint may, however, be disappointed.
As it is proposed, the new board would have authority over all 6,000 banks in the euro zone.
If a bank were to run into trouble, the ECB would inform this executive board, which could then vote on whether to close or salvage the bank.
The board would have representatives from the European Central Bank, the European Commission, the home country of the bank under review and from states where it has branches.
The Commission hopes that this group, which will vary according to the bank, will plan for any emergency, leaving little to decide at short notice should a lender face collapse.